You Can’t Change That – We Had a Deal!

On December 9, 2014, the U.S. Civilian Board of Contract Appeals (“CBCA”) decided Kiewit-Turner, a Joint Venture v. Department of Veterans Affairs, in which general contractor Kiewit-Turner (“KT”) scored a major victory against the Department of Veterans Affairs (“VA”). The CBCA ruled that a change order required the VA to deliver a design that could be built for costs that were capped at a specified amount — shifting risk to the owner from the contractor.
Readers outside of Aurora, Colorado may not have heard of the VA’s project to build a new hospital with KT. It has the hallmarks of a project that contractors grow to hate, while news anchors come to love: budget overruns, work stoppages, and a staff that the construction manager once called the most dysfunctional that he had ever seen.

Trouble dogged this project from the start. Sensibly, the parties decided it was time to make a deal to mitigate problems before they erupted. They signed a contract modification (SA-007) that required the VA to produce a design for the hospital that met their Estimated Construction Cost at Award (“ECCA”) amount of approximately $600 million. As time went on, complications mounted – delayed payments, late delivery of construction plans, and ballooning costs. By mid-2013, the problem had grown so untenable that KT sought relief from the CBCA. In December of 2014, the Board found that the VA had failed to meet the contractual obligations of SA-007 and ordered the VA to stick with its deal.

The Board divided its analysis into three parts. The first question was whether SA-007 bound the VA to provide a design for the ECCA amount. Put simply: Did it create a cap on construction costs? This was an easy call because, in the Board’s own words, “SA-007 could not be more clear.” The Board buttressed its opinion with evidence that the parties had previously understood that SA-007’s language meant exactly what it said. Of course, the VA argued the opposite, but its own actions undercut those arguments: the VA had never come remotely close to providing a workable design for any amount that the parties had contemplated.

Second, the Board questioned whether the VA materially breached SA-007 by failing to provide a design for the hospital for the ECCA amount. Generally speaking, a breach is material if it either relates to a matter of vital importance to the agreement or goes to the essence of the contract. To make this call, the Board applied the five factor test found in section 241 of the Second Restatement of Contracts. After exhaustively examined all of the factors, the Board concluded that the VA, by not “comport[ing] with standards of good faith and fair dealing,” had materially breached its agreement with KT.

Finally, the Board reached the most pressing question: could KT stop work? This, too, was an easy call. Relying on cases from the Court of Appeals for the Federal Circuit, the Board cited the axiom that “[u]pon material breach of a contract the non-breaching party has the right to discontinue performance of the contract.” To hold otherwise, the Board said, would produce the backwards result of allowing a party in breach to then turn around and demand the non-breaching party’s continued performance of the contract.

In the end, the Board’s decision allowed KT to stop performance on the hospital. However, when KT announced that it would walk away, concerned lawmakers immediately sprang to action. Only a few days later, KT received a letter penned by both Colorado senators and all seven of Colorado’s House members, all asking the contractor to reconsider. This letter did the trick, as negotiations resumed and the parties reached an interim deal. In exchange for payments by the VA and a promise to bring in the Army Corps of Engineers as advisors, KT agreed to resume construction on the project on December 22, 2014. Although far from perfect, there is reason for optimism about this project: crews are back at work, an interim agreement is in place, and the parties are working on a long-term plan for the project – hopefully one that will stick.